Solutions - Chapter 4

2
Chapter 4
Reporting and Analyzing Cash Flows
Learning Objectives – coverage by question

Mini- Cases
Exercises Problems
Exercises and Projects
LO1 – Explain the purpose of the

statement of cash flows and classify
cash transactions by type of 21 - 24, 29 58, 59
business activity: operating, investing
and financing
LO2 – Construct the operating

34, 38, 41,
activities section of the statement of 25, 27, 30, 31 47, 49, 51, 53 59
43, 44
cash flows using the direct method.
LO3 – Reconcile cash flows from

operations to net income and use the 21, 23, 45, 46, 48,
35, 42, 44 57, 58, 59
indirect method to compute operating 25 - 29 50 - 56
cash flows.
LO4 – Construct the investing and

46, 48,
financing activities sections of the 21, 24 36 - 40, 42 57, 58, 59
50 - 56
statement of cash flows.
LO5 – Compute and interpret ratios

that reflect a company’s liquidity and 46, 48, 50,
32, 33, 35, 43 59
solvency using information reported 52, 55, 56
in the statement of cash flows.
LO6 – Appendix 4A: Use a

spreadsheet to construct the 55
statement of cash flows.
©Cambridge Business Publishers, 2020

Solutions Manual, Chapter 4 4-1
QUESTIONS
Q4-1. Cash equivalents are short-term, highly liquid investments that firms acquire
with temporarily idle cash to earn interest on these excess funds. To qualify as
a cash equivalent, an investment must (1) be easily convertible into a known
cash amount and (2) be close enough to maturity so that its market value is not
sensitive to interest rate changes (generally, investments with initial maturities
of three months or less). Three examples of cash equivalents are treasury bills,
commercial paper, and money market funds.
Q4-2. Cash equivalents are included with cash in a statement of cash flows because
the purchase and sale of such investments are considered to be part of a firm's
overall management of cash rather than a source or use of cash. Similarly, as
statement users evaluate cash flows, it may matter very little to them whether
the cash is on hand, deposited in a bank account, or invested in cash
equivalents.
Q4-3. Operating activities
Inflow: Cash received from customers
Outflow: Cash paid to suppliers
Investing activities
Inflow: Sale of equipment
Outflow: Purchase of stocks and bonds
Financing activities
Inflow: Issuance of common stock
Outflow: Payment of dividends
Q4-4. a. Investing; outflow.
b. Investing; inflow.
c. Financing; outflow.
d. Operating (direct method, not shown separately under indirect method);
inflow.
e. Financing; inflow.
f. Operating (direct method, not shown separately under indirect method);
inflow.
g. Operating (direct method, not shown separately under indirect method);
outflow.
h. Operating (direct method, not shown separately under indirect method);
inflow.

4-2 Financial Accounting, 6th Edition
Q4-5. This is a noncash investing and financing event. It must be reported in a
supplementary schedule to the statement of cash flows.
Q4-6. Noncash investing and financing transactions are disclosed as supplemental
information to a statement of cash flows because a secondary objective of cash
flow reporting is to present information about investing and financing activities.
Noncash investing and financing transactions, generally, affect future cash
flows. Issuing bonds payable to acquire equipment, for example, requires future
cash payments for interest and principal on the bonds. On the other hand,
converting bonds payable into common stock eliminates future cash payments
related to the bonds. Knowledge of these types of events, therefore, should be
helpful to users of cash flow data who wish to assess a firm's future cash flows.
Q4-7. A statement of cash flows helps external users assess the amount, timing, and
uncertainty of future cash flows to the enterprise. These assessments help
users evaluate their own future cash receipts from their investments in, or loans
to, the firm. A statement of cash flows shows the periodic cash effects of a
firm's operating, investing, and financing activities. Distinguishing among these
different categories of cash flows helps users compare, evaluate, and predict
cash flows. With cash flow information, creditors and investors are better able
to assess a firm's ability to settle its liabilities and pay its dividends. Over time,
the statement of cash flows permits users to observe and analyze
management's investing and financing policies. A statement of cash flows also
provides information useful in evaluating a firm's financial flexibility (which is its
ability to generate cash to respond to unanticipated needs and opportunities).
Q4-8. The direct method presents the net cash flow from operating activities by
showing the major categories of operating cash receipts and cash payments
(such as cash received from customers, cash paid to employees and suppliers,
cash paid for interest, and cash paid for income taxes). The indirect (or
reconciliation) method, in contrast, presents the net cash flow from operating
activities by applying a series of adjustments to the accrual net income to
convert it to a cash basis.
Q4-9. Under the indirect method, depreciation is added to net income because, as a
noncash expense, it was deducted in computing net income. Adding
depreciation to net income, therefore, eliminates it from the cash-basis income
amount. Amortization and depletion expenses are handled the same way.
Q4-10. Under the indirect method, the $98,000 cash received from the sale of the land
will appear in the cash flows from investing activities section of the statement of
cash flows. In addition, the $28,000 gain from the sale will be deducted from
net income as one of the adjustments made to determine the net cash flow
from operating activities.

Q4-11. Net income $ 88,000
Add (deduct) items to convert net income to cash basis
Depreciation expense 6,000
Subtract change in accounts receivable 13,000
Subtract change in inventory (9,000)
Add change in accounts payable (3,500)
Add change in income tax payable 1,500
Net cash provided by operating activities $ 96,000
Q4-12. The separate disclosures required for a company using the indirect method in
the statement of cash flows are (1) cash paid during the year for interest (net of
amount capitalized) and for income taxes, (2) all noncash investing and
financing transactions, and (3) the policy for determining which highly liquid,
short-term investments are treated as cash equivalents.
Q4-13. The statement of cash flows will show a positive net cash flow from operating
activities if operating cash receipts exceed operating cash payments. This
could happen, for example, if noncash expenses (such as depreciation and
amortization) exceed the net loss. It would also happen if operating cash
receipts exceed sales by more than the loss or if operating cash payments are
less than accrual expenses by more than the loss (or some combination of
these events).
Q4-14. Sales $925,000
+ Accounts receivable decrease 14,000
= Cash received from customers $939,000
Q4-15. Wages expense $ 86,000
+ Wages payable decrease 1,100
= Cash paid to employees $ 87,100
Q4-16. Advertising expense $ 43,000
+ Prepaid advertising increase 1,600
= Cash paid for advertising $ 44,600
Q4-17. Under the direct method, the $5,100 cash received from the sale of equipment
will appear in the cash flows from investing activities section of the statement of
cash flows.
Q4-18. The separate disclosures required for a company using the direct method in the
statement of cash flows are (1) a reconciliation of net income to net cash flow
from operating activities, (2) all noncash investing and financing transactions,
and (3) the policy for determining which highly liquid, short-term investments
are treated as cash equivalents.

Q4-19. The operating cash flow to current liabilities ratio is calculated by dividing net
cash flow from operating activities by average current liabilities. This ratio is a
measure of a firm's ability to liquidate its current liabilities.
Q4-20. The operating cash flow to capital expenditures ratio is calculated by dividing a
firm's cash flow from operating activities by its annual capital expenditures. A
ratio below 1.00 means that the firm's current operating activities are not
providing enough cash to cover the capital expenditures. A ratio above 1.0 is
normally considered a sign of financial strength.

MINI EXERCISES
M4-21. (5 minutes)
LO 1, 3, 4
a. Positive adjustment
b. Negative adjustment
c. Positive adjustment
d. Positive adjustment
e. Negative adjustment
M4-22. (10 minutes)

LO 1
a. Cash flow from an operating activity.

b. Cash flow from an investing activity.
c. Cash flow from an investing activity.
d. Cash flow from an operating activity.
e. Cash flow from a financing activity.
f. Cash flow from a financing activity.
g. Cash flow from an investing activity.
M4-23. (15 minutes)

LO 1, 3
GENERAL MILLS, INC.

Selected Items from the Cash Flow Statement
1 Long-term debt repayments Financing
2 Change in receivables Operating
3 Depreciation and amortization Operating
4 Change in prepaid expenses Operating
5 Dividends paid Financing
6 Stock-based compensation Operating
7 Cash received from sales of assets and businesses Investing
8 Net earnings Operating
9 Change in accounts payable Operating
10 Proceeds from common stock issued Financing
11 Purchases of land, buildings and equipment Investing

M4-24. (10 minutes)
LO 1, 4
a. (3) Cash flow from a financing activity.

b. (1) Cash flow from an operating activity.
c. (4) Noncash investing and financing activity.
d. (1) Cash flow from an operating activity.
e. (1) Cash flow from an operating activity.
f. (5) None of the above (a change in the composition of cash and cash equivalents).
M4-25. (30 minutes)

LO 2, 3
a.
Balance Sheet Income Statement
Accts.
Trans- Cash Receiv- Inven- Accts. Contrib. Earned Net
action Asset + able + tories = Payable + Capital + Capital Revenue - Expenses = Income
(1) + +507,400 + = + + +507,400 +507,400 - = +507,400
(2) +91,500 + + = + + +91,500 +91,500 - = +91,500
(3) + +–320,100 = + + –320,100 - +320,100 = –320,100
(4) + + –63,400 = + + –63,400 - +63,400 = –63,400
(5) + ++351,600 = +351,600 + + - =
(6) -47,700 + + +47,700 = + + - =
(7) +483,400 + –483,400 + = + + - =
(8) –340,200 + + = –340,200 + + - =
(9) -172,300 + + = + + -172,300 - +172,300 = -172,300
Total +14,700 + +24,000 + +15,800 = +11,400 + + +43,100 +598,900 - +555,800 = +43,100
b. Net income was €43,100 (from the net income column), and cash flow from
operating activities was €14,700 (from the cash column).
c. 1. Accounts receivable increased by €24,000,

2. Inventories increased by €15,800, and
3. Accounts payable increased by €11,400.

d. The accounting equation is kept with every entry, so it is kept for the totals over the
period.
Cash flow + change in accounts receivable + change in inventory
= Change in accounts payable + net income.
This relationship can be presented in the following indirect method cash flow from
operating activities.
Net income € 43,100
- Change in accounts receivable –24,000
- Change in inventories –15,800
+ Change in accounts payable +11,400
Cash flow from operating activities € 14,700
M4-26. (15 minutes –INDIRECT METHOD)

LO 3
Net income $ 45,000

Add back depreciation 8,000
Subtract gain on sale of investments (9,000)
Subtract change in operating assets:
Accounts receivable (9,000)
Inventory (6,000)
Prepaid rent 2,000
Add change in operating liabilities:
Accounts payable 4,000
Income tax payable (2,000)

M4-27. (30 minutes)
LO 2, 3
a.
Accts.
Trans- Cash Prepaid Accum. Wages Contr. Earned Net
+ Receiv- + - = + + Revenue - Expenses =
action Asset Rent Deprec. Payable Capital Capital Income
able
(1) + +769,200 + - = + + +769,200 +769,200 - = +769,200
(2) +46,200 + + - = + + +46,200 +46,200 - = +46,200
(3) + + - = +526,700 + + –526,700 - +526,700 = –526,700
(4) –149,100 + + +149,100 - = + + - =
(5) –521,600 + + - = –521,600 + + - =
(6) + + –117,900 - = + + –117,900 - +117,900 = –117,900
(7) +724,100 + –724,100 + - = + + - =
(8) –122,800 + + - = + + –122,800 - +122,800 = –122,800
(9) + + - +23,000 = + + -23,000 - +23,000 = -23,000
Total –23,200 + +45,100 + +31,200 - +23,000 = +5,100 + + +25,000 +815,400 - +790,400 = +25,000
b. Net income was $25,000 (from the net income column), and cash flow from
operating activities was –$23,200 (from the cash column).
c. 1. Accounts receivable increased by $45,100,

2. Prepaid rent increased by $31,200,
3. Accumulated depreciation (a contra-asset) increased by $23,000 due to
depreciation expense and
4. Wages payable increased by $5,100.
d. The accounting equation is kept with every entry, so it is kept for the totals over the
period.
Cash flow + change in accounts receivable + change in prepaid rent

– change in accumulated depreciation
= Change in wages payable + net income.
This relationship can be presented in the following indirect method cash flow from
operating activities.
Net income $ 25,000
+ Depreciation expense 23,000
– Change in accounts receivable –45,100
– Change in prepaid rent –31,200
+ Change in wages payable +5,100
Cash flow from (used in) operating activities ($ 23,200)

M4-28. (15 minutes—INDIRECT METHOD)
LO 3
Net loss $(21,000)

Add (deduct) items to convert net loss to cash basis
Add back depreciation 8,600
Subtract change in operating assets:
Accounts receivable (9,000)
Inventory (3,000)
Prepaid expenses (3,000)
Add change in operating liabilities:
Accounts payable 4,000
Accrued liabilities (2,600)
Weber Company's 2018 operating activities provided $4,000 cash. The dividend paid to
shareholders affects cash flows from financing activities.
M4-29. (20 minutes)

LO 1, 3
A “+” indicates that the amount is added and a “-“ indicates that it is subtracted when
preparing the cash flow statement using the indirect method.
NORDSTROM, INC.
Consolidated Statement of Cash Flows – Selected Items
1 Decrease in accounts receivable Operating +-
2 Capital expenditures Investing -
3 Proceeds from long-term borrowings Financing +
4 Increase in deferred income tax net liability Operating +
5 Principal payments on long-term borrowings Financing -
6 Increase in merchandise inventories Operating -
7 Increase in prepaid expenses and other assets Operating -
8 Proceeds from issuances under stock compensation plans Financing +
9 Increase in accounts payable Operating +
10 Net earnings Operating +
11 Payments for repurchase of common stock Financing -
12 Increase in accrued salaries, wages and related benefits Operating +
13 Cash dividends paid Financing -
14 Depreciation and amortization expenses Operating +

M4-30. (15 minutes—DIRECT METHOD)
LO 2
a. Rent expense $ 60,000

– Prepaid rent decrease (2,000)
= Cash paid for rent $ 58,000

Noncash Contr. Earned Net
Transaction Cash + = Liabilities + + Revenue - Expenses =
Assets Capital Surplus Income
10,000
Begin
+ Prepaid = + + - =
Balance
Rent
+X
Make rent
-X + Prepaid = + + - =
payment
Rent
Record -60,000 -60,000 +60,000
rent + Prepaid = + + Retained - Rent = -60,000
expense Rent Earnings Expense
End
+ 8,000 = + + - =
Balance
X must equal $58,000 to make the FSET balance.
b. Interest income $ 16,000

– Interest receivable increase (700)
= Cash received as interest $ 15,300

3,000
Begin
+ Interest = + + - =
Balance
Receivable
Record +16,000 +16,000 +16,000
interest + Interest = + + Retained Interest - = +16,000
income Receivable Earnings income
Receive
interest +X + -X = + + - =
payment
End
+ 3,700 = + + - =
Balance
X must equal $15,300 to make the FSET balance.

c.
Cost of goods sold $ 98,000
+ Inventory increase 3,000
+ Accounts payable decrease 4,000
= Cash paid for merchandise purchased $105,000

11,000
Begin 19,000
+ = Accounts + + - =
Balance Inventory
Payable
Purchase
+ +X = +X + + - =
inventory
-Y
Pay
-Y + = Accounts + + - =
supplier
Payable
Recognize 98,000
-98,000
Cost of -98,000 Cost of
+ = + + Retained - = -98,000
Goods Inventory Goods
Earnings
Sold Sold
End
+ 22,000 = 7,000 + + - =
Balance
To make the inventory account work properly, X (purchases) must equal $101,000. If
purchases were $101,000, then Y (payments to suppliers) must equal $105,000.
M4-31. (15 minutes—DIRECT METHOD)

LO 2
Operating cash flow + change in operating assets

= net income + change in operating liabilities
or
Net income - change in operating assets + change in operating liabilities

= operating cash flow
Effect of sales on net income $825,000

– Change in accounts receivable (11,000)
= Effect of customers on cash $814,000
Effect of cost of goods sold on net income ($550,000)

- Change in inventory (13,000)
+ Change in accounts payable (6,000)
= Effect of merchandise purchases on cash ($569,000)
Chakravarthy Company received $814,000 in cash from its customers and paid $569,000
in cash to its suppliers.

EXERCISES
E4-32. (20 minutes)

LO 5
(All dollar amounts in millions)

a. Merck: $6,447/$17,909 = 0.360
Pfizer: $16,470/$30,771 = 0.535
Abbott Labs: $5,570/$7,786 = 0.715
Johnson & Johnson: $21,056/$28,412 = 0.741
b. Merck: $6,447 – $1,888 = $4,559

Pfizer: $16,470 – $1,956 = $14,514
Abbott Labs: $5,570 – $1,135 = $4,435
Johnson & Johnson: $21,056 – $3,279 = $17,777
c. None of the firms has sufficient cash flow to cover their current liabilities although
none of the ratios is alarmingly low. The industry ratios shown in Chapter 5, show
that only Merck is below median. Pfizer and Johnson & Johnson are the larger of
these companies and have relatively more cash left over after capital expenditures
to consider using on other activities that could strengthen the firm’s operating or
financial position. But all four have significant free cash flow that could be invested
or returned to shareholders in the form of dividends or stock repurchases. Given
that these firms are of different sizes and have different research program success,
it is difficult to generalize further.
E4-33. (20 minutes)

LO 5
(All dollar amounts in millions)

a. Wal-Mart: $28,337/$72,725 = 0.390
Coca-Cola: $6,995/$26,863 = 0.260
ExxonMobil: $30,066/$52,705 = 0.570
b. Wal-Mart: $28,337 – ($10,051 – $378) = $18,664

Coca-Cola: $6,995 – ($1,675 – $104) = $5,424
ExxonMobil: $30,066 – ($15,402 – $3,103) = $17,767
c. All three companies are producing much more cash than needed for capital
expenditures. All of them are returning substantial amounts of cash to shareholders
through dividends and share repurchases. ExxonMobil appears to be in the best
position with respect to OCFCL, but it is lower than the industry average reported in
Chapter 5. Wal-Mart and Coca-Cola have lower ratios, and are also below the
average ratio for their industries.

E4-34. (30 minutes—INDIRECT METHOD)
LO 2
MASON CORPORATION
Statement of Cash Flows
For Year Ended December 31, 2018
Cash flows from operating activities

Cash received from customers $194,000
Cash received as interest 6,000
Cash paid to employees and suppliers (148,000)
Cash paid as income taxes (11,000)
Cash flows from investing activities
Sale of land 40,000
Purchase of equipment (89,000)
Net cash used by investing activities (49,000)
Cash flows from financing activities
Issuance of bonds payable 30,000
Acquisition of treasury stock (10,000)
Payment of dividends (16,000)
Net cash provided by financing activities 4,000
Net decrease in cash (4,000)
Cash at beginning of year 16,000
Cash at end of year $ 12,000
E4-35. (15 minutes—INDIRECT METHOD)

LO 3, 5
a. Net income $113,000

Accounts receivable increase (5,000)
Inventory decrease 6,000
Prepaid insurance increase (1,000)
Accounts payable increase 4,000
Wages payable decrease (2,000)
Net cash provided by operating activities $115,000
b. $115,000/[($31,000 + $29,000)/2] =3.83

E4-36. (15 minutes–INVESTING ACTIVITIES)
LO 4
The basic approach here is to use the beginning and ending balances and the
additional information to reconstruct what must have happened during 2018. Begin by
setting up the T-accounts for property, plant and equipment with the beginning and
ending balances.
Property, plant and - -

Accumulated
+ equipment at cost +
depreciation (XA)
(A)
Beg. balance 1,000 350 Beg. balance
Ending 1,200 390 Ending balance

balance
At this point in the book, we know four entries that can affect these two accounts – (1)
acquisitions using cash, (2) acquisitions without cash (other financing), (3) disposals,
and (4) depreciation expense. The journal entries for these entries are given below,
with amounts given in the problem filled in.
(1) Property, plant and equipment at cost (+A) 300

Cash (-A) 300
To record purchase of property, plant and equipment with cash.

Mortgage payable (+L) 100
To record purchase of property, plant and equipment with financing.
(3) Cash (+A) 100

Accumulated depreciation (-XA, +A) Y
Property, plant and equipment at cost (-A) X
Gain on equipment disposal (+R, +SE) 20
To record sale of used equipment.
(4) Depreciation expense (+E, -SE) Z

Accumulated depreciation (+XA, -A) Z
To record depreciation expense.
continued next page

The three unknowns in the journal entries correspond to the three questions in the
problem. We begin by putting the journal entry amounts into the T-accounts.

Accumulated
depreciation (XA)
(A)
Beg. balance 1,000 350 Beg. balance
(1) 300
(2) 100
(3) X Y (3)
Z (4)
Ending 1,200 390 Ending balance
balance
a. The PPE at cost account will only balance if the value X equals 200. So, the original
cost of the used equipment that was sold is €200. We can put that amount in the T-
account (so it balances) and also in Journal entry (3).
b. Now, looking at journal entry (3), we see that there is only one unknown left – the
depreciation that had accumulated on the used equipment. In order for the entry to
balance (with debits equal to credits), the accumulated depreciation must have been
120 (= Y). Cost of 200 and accumulated depreciation of 120 would produce a net
book value of 80, so when Meubles Fischer sold it for 100, they recorded a gain of 20
on the disposal.
c. Back at the Accumulated depreciation T-account, we can fill in the entry for (3),
leaving only the depreciation expense to determine for entry (4). Knowing that the
disposal reduced the contra-asset by 120, and that the contra-asset increased by 40
over the year, we can infer than the depreciation expense must have been €160 (= Z).

E4-37. (15 minutes—INVESTING ACTIVITIES)
LO 4
The basic approach here is to use the beginning and ending balances and the
additional information to reconstruct what must have happened during 2018. Begin by
setting up the T-accounts for property, plant and equipment with the beginning and
ending balances.

Accumulated
depreciation (XA)
(A)
Beg. balance 175 78 Beg. balance
Ending 183 83 Ending balance

balance
At this point in the course, we know four entries that can affect these two accounts – (1)
acquisitions using cash, (2) acquisitions without cash (other financing), (3) disposals,
and (4) depreciation expense. The journal entries for these entries are given below,
with amounts given in the problem filled in.

Cash (-A) 28
To record purchase of property, plant and equipment with cash.

Mortgage payable (+L) 0
To record purchase of property, plant and equipment with financing.
(3) Cash (+A) Z

Accumulated depreciation (-XA, +A) Y
Loss on equipment disposal (+E, -SE) 5
Property, plant and equipment at cost (-A) X
To record sale of used equipment.
(4) Depreciation expense (+E, -SE) 17

Accumulated depreciation (+XA, -A) 17
To record depreciation expense.
continued next page

The three unknowns in the journal entries correspond to the three questions in the
problem. We begin by putting the journal entry amounts into the T-accounts.

Accumulated
depreciation (XA)
(A)
Beg. balance 175 78 Beg. balance
(1) 28
(2) 0
(3) X Y (3)
17 (4)
Ending 183 83 Ending balance
balance
a. The PPE at cost account will only balance if the value X equals 20. So, the original
cost of the used equipment that was sold is £20. We can put that amount in the T-
account (so it balances) and also in Journal entry (3).
b. The accumulated depreciation account will only balance if the value Y equals 12.
So, the accumulated depreciation on the used equipment sold must be £12, and that
amount can be entered into transaction (3) above.
c. Now, looking at journal entry (3), we see that there is only one unknown left – the
amount of cash received from disposal of the used equipment. In order for the entry
to balance (with debits equal to credits), the cash amount must have been £3 million
(= Z). Cost of 20 and accumulated depreciation of 12 would produce a net book
value of 8, so when Kasznik Ltd. sold it for 3, they recorded a loss of 5 on the
disposal.

E4-38. (30 minutes)
LO 2, 4
a. The analysis from the chapter shows that
Cash flow Change in Change in Net income

+ = +
(payments) inventory accounts payable (COGS expense)
-57 +1,484
X + = + -89,052
(=8,899-8,956) (=12,484-11,000)
The solution to this is that X = -$89,052 + 57 + 1,484 = -$87,511. So, the payments to
suppliers reduced cash by $87,511 million in fiscal year 2017.
b. The net property and equipment account decreased by $693 million (=$13,642 –
$14,335). Depreciation expense would have decreased this balance by $1,545 million
in fiscal year 2017, so the net investment must have been $852 million (=-$693 +
$1,545) to result in the ending balance of $13,642 million.
c. With the beginning balance of $27,684 million in retained earnings, net earnings of
$4,078 would have increased retained earnings to $31,762 million. But the ending
balance in retained earnings is $30,137 million, so Walgreens Boots must have paid
$1,625 million in dividends (=$31,762 - $30,137).
E4-39. (15 minutes)

LO 4
a. Cash flows from investing activities will show:

Purchase of stock investments $ (80,000)
Sale of stock investments 59,000
b. Cash flows from financing activities will show:

Issuance of bonds $130,000
Retirement of bonds (131,000)

E4-40. (20 minutes)
LO 4
a. The net increase in property and equipment, cost was $821,989 (= $98,190,992 -
$97,369,003). Expenditures should have increased this by $1,182,854, and the non-
cash transaction another $239,382. Therefore, the original cost of the property and
equipment sold must have been $600,247 (= $1,182,854 + $239,382 - $821,989).
Depreciation expense should have increased the accumulated depreciation account by

$3,876,111, but the account increased by only $3,275,864. The accumulated
depreciation on the property and equipment sold must account for the difference,
making it $600,247 (=$3,876,111 - $3,275,864).
b. The book value of the property and equipment sold was zero (=$600,247 – $600,247),
and the reported gain on sale of the property and equipment was $56,446. Therefore,
the cash proceeds on the sale of these fully-depreciated assets must have been
$56,446!
c.
Cash (+A) $ 56,446
Accumulated depreciation (-XA, +A) 600,247
Property and equipment, cost (-A) $ 600,247
Gain on sale of property and equipment (+R, +SE) 56,446
d. Retained earnings increased by $1,688,643 (= $20,738,143 – 19,049,500), and net

income was $3,184,803, which would increase retained earnings. The difference
would be accounted for by cash dividends paid to shareholders, and the amount is
$1,496,160 ($3,184,803 - $1,688,643). The dividends paid are approximately equal to
previous years even though earnings are considerably higher, demonstrating that
companies are reluctant to change dividends as earnings fluctuate up and down..
E4-41. (20 minutes—DIRECT METHOD)

LO 2
a. Advertising expense $ 62,000

+ Prepaid advertising increase 4,000
= Cash paid for advertising $ 66,000
b. Income tax expense $ 29,000

+ Income tax payable decrease 2,200
= Cash paid for income taxes $ 31,200
c. Cost of goods sold $180,000

– Inventory decrease (5,000)
– Accounts payable increase (2,000)
= Cash paid for merchandise purchased $173,000

E4-42.
LO 3, 4
HOSKINS CORPORATION
Statement of Cash Flows
Year ended December 31, 2018
Cash Flows from Operations:
Net income $ 700
Adjustments:
Add back Depreciation 350
– Change in Accounts Receivable (900)
– Change in Inventory (100)
– Change in Prepaid Expenses 250
+ Change in Accounts Payable 400
+ Change in Income Taxes Payable (100)
Cash Flows from Operating Activities $ 600
Cash Flows from Investing:

Purchases of Equipment (1,200)
Proceeds from Disposal of Equipment 600
Cash Flows from Investing Activities (600)
Cash Flows from Financing:

Dividends Paid (250)
Increase in Short-term Debt 1,500
Decrease in Long-term Debt (1,000)
Cash Flows from Financing Activities 250
Net Change in Cash 250

Beginning Cash Balance 300
Ending Cash Balance $ 550

E4-43. (30 minutes—DIRECT METHOD)
LO 2, 5
a.
Sales $750,000
– Accounts Receivable Increase (5,000)
= Cash Received from Customers $745,000
Cost of Goods Sold $470,000

– Inventory Decrease (6,000)
– Accounts Payable Increase (4,000)
= Cash Paid for Merchandise Purchased $460,000
Wages Expense $110,000

+ Wages Payable Decrease 2,000
= Cash Paid to Employees $112,000
Insurance Expense $ 15,000

+ Prepaid Insurance Increase 1,000
= Cash Paid for Insurance $ 16,000
Cash Flows from Operating Activities

Cash Received from Customers $745,000
Cash Paid for Merchandise Purchased $460,000
Cash Paid to Employees 112,000
Cash Paid for Rent 42,000
Cash Paid for Insurance 16,000 630,000
Net Cash Provided by Operating Activities $115,000
b. $115,000/[($31,000 + $29,000)/2] =3.83
E4-44. (15 minutes)

LO 2, 3
1. True ---
2. False $25
3. False $10
4. False $0 Changing financial reporting depreciation will change
net income, but not cash flows. Changing tax
depreciation will change cash flows, but not net
income. This issue is examined later in Chapter 10.


Solutions - Chapter 4

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Solutions - Chapter 4

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2

Learning Objectives – coverage by question

LO1 – Explain the purpose of the

LO2 – Construct the operating

LO3 – Reconcile cash flows from

LO4 – Construct the investing and

LO5 – Compute and interpret ratios

LO6 – Appendix 4A: Use a

©Cambridge Business Publishers, 2020

©Cambridge Business Publishers, 2020

©Cambridge Business Publishers, 2020

©Cambridge Business Publishers, 2020

©Cambridge Business Publishers, 2020

M4-22. (10 minutes)

a. Cash flow from an operating activity.

M4-23. (15 minutes)

GENERAL MILLS, INC.

©Cambridge Business Publishers, 2020

a. (3) Cash flow from a financing activity.

M4-25. (30 minutes)

c. 1. Accounts receivable increased by €24,000,

©Cambridge Business Publishers, 2020

M4-26. (15 minutes –INDIRECT METHOD)

Net income $ 45,000

©Cambridge Business Publishers, 2020

(2) +46,200 + + - = + + +46,200 +46,200 - = +46,200

(3) + + - = +526,700 + + –526,700 - +526,700 = –526,700

(4) –149,100 + + +149,100 - = + + - =

(5) –521,600 + + - = –521,600 + + - =

(6) + + –117,900 - = + + –117,900 - +117,900 = –117,900

(7) +724,100 + –724,100 + - = + + - =

(8) –122,800 + + - = + + –122,800 - +122,800 = –122,800

(9) + + - +23,000 = + + -23,000 - +23,000 = -23,000

c. 1. Accounts receivable increased by $45,100,

Cash flow + change in accounts receivable + change in prepaid rent

©Cambridge Business Publishers, 2020

Net loss $(21,000)

M4-29. (20 minutes)

©Cambridge Business Publishers, 2020

a. Rent expense $ 60,000

Balance Sheet Income Statement

X must equal $58,000 to make the FSET balance.

b. Interest income $ 16,000

Balance Sheet Income Statement

X must equal $15,300 to make the FSET balance.

©Cambridge Business Publishers, 2020

Balance Sheet Income Statement

M4-31. (15 minutes—DIRECT METHOD)

Operating cash flow + change in operating assets

Net income - change in operating assets + change in operating liabilities

Effect of sales on net income $825,000

Effect of cost of goods sold on net income ($550,000)

©Cambridge Business Publishers, 2020

E4-32. (20 minutes)

(All dollar amounts in millions)

b. Merck: $6,447 – $1,888 = $4,559

E4-33. (20 minutes)

(All dollar amounts in millions)

b. Wal-Mart: $28,337 – ($10,051 – $378) = $18,664

©Cambridge Business Publishers, 2020

Cash flows from operating activities

E4-35. (15 minutes—INDIRECT METHOD)

a. Net income $113,000